Reference no: EM132753418
Question - Clark Creations is considering a proposal to sell an existing lathe and purchase a new computer-operated lathe. Information on the existing lathe and the computer-operated lathe follow:
Existing lathe Computer-operated lathe
Original Cost $100,000 $300,000
Carrying Value 40,000 -
Fair Value now 20,000 -
Salvage value in 4 years - 60,000
Annual cash operating costs 200,000 50,000
Remaining useful life 4 years 4 years
Assuming that the company's cost of capital is 10%, which is to be used in discounted cash flow analysis.
Required -
a) Compute the net present value of investing in the computer-operated lathe.
b) Compute the profitability index of investing in the computer-operated lathe.
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